The recently concluded corporate results season was uninspiring. During the quarter, 37.4% (vs. 32.0x% in 1QCY14 and 34.4% in 4QCY13) of companies under our coverage delivered set of results which were below expectations. Gaming, Oil & Gas as well as Banking were the 3 heavyweight sectors that delivered mix-to-negative results while Automotive and Construction sectors also saw significant downgrades in our earnings estimates. Consequently, our FY14E core net profit growth estimate for FBMKLCI was revised to 4.9% (from 11.8% previously), which is inline with consensus estimate. In tandem with the weaker results and less bullish earnings growth prospect, our Index Target has also been revised lower to 1,910 (vs. consensus target of 1,955) from 1,960 previously. While we do not rule out that FBMKLCI could surpass this target and test 1,980 in 2015 as per our Bottom-up Index Forecasting Model, we prefer to stick with our earlier strategy, which is to buy into weakness if and when the index corrects towards the 1,840/35-level, as we see no imminent market rerating catalyst at this juncture.

Another disappointing quarter (see Figure 1-3 for details). The recently concluded corporate results season was again much weaker than expected despite the ability of the domestic economy to register an average growth of 6.3% in the 1st 6 months of the year.

Based on the 131 stocks under our coverage which released their results from June 2014 to August 2014, merely 75 and 7 of them were either within and above expectations, respectively. In order words, 49 results or 37.4% were below expectations, resulting in the “disappointment ratio” deteriorating to the “highest” point for the past few quarters (vs. 32.0% in 1QCY14 and 34.4% in 4QCY13). On average, we saw 2.0%-5.0% earnings forecast downgrades for current and next financial year. Post-results, our FY14E core net profit growth estimate for FBMKLCI was revised to 4.9% from 11.8% previously, while FY15F core net profit growth estimates were revised marginally higher to 11.3% from 10.2% due to low-base effect in contrast to our earlier estimate of 13.3%-8.7% (see Figure 5 for details). In absolute terms, the projected FY15F earnings number is actually c.3% lower as compared with the previous quarter’s forecast.

Out of the various sectors under our coverage, Gaming and Oil & Gas as well as Banking were the 3 heavyweight sectors that delivered mix-to-negative results. These sectors saw downward revisions of 9.5%-4.9%, 6.9%-2.3% and 3.2%-3.3%, on average, in their respective FY14E-FY15F earnings estimates. During the quarter, we also saw significant earnings downgrade in Automotive and Construction sectors. The former seen 14.5%-9.3% downgrades in its FY14E-FY15F numbers while the latter saw downward revisions of 8.7%-0.0%. The details of various sectors’ performances are shown in Appendix (see Figure 4 for details).

Inline with the weaker results and less bullish earnings growth/driver assumptions, our Index Target has also been revised lower. Based on our combined (i) Top-Down (~1,840 @ 17.5x FY15F PER) and (ii) Bottom-Up (~1,980 @ 18.9x FY15 PER) approaches, our Index Fair Value (FV) has now been revised to 1,910 (from 1,960 previously), implying FY14E & FY15F PERs of 20.3x & 18.2x, respectively. Our Index FV is slightly below (c.2%) the consensus Index Target of ~1,955, representing 19.4x and 17.6x to consensus’ current year and next year earnings estimates (see Figure 6 for details). This index target is also backed by current year and next year earnings growth rates of 4.9% and 9.7%.

With such earnings estimates and index target downgrades, we believe the short-term upside for FBMKLCI could be capped. Besides, based on the historical trend of discount between FBMKLCI and its Consensus Target, the FBMKLCI could be limited to its recent high of 1,889.5. To recap, FBMKLCI could become toppish if and when it trades <3% discount to its current consensus target of 1,955, which is the c.1,895-level. 

Nonetheless, we do not rule out that FBMKLCI could surpass this FV and to as high as 1,980 in 2015 should we employ FY15 numbers in our forecasting model. As for now, we stick to our earlier strategy, which is to buy into weakness if and when the index corrects towards the 1,840/35-level, which is the average discount of 6% to Consensus Target.

Source: Kenanga